November May Become An October In Disguise

BUSINESS

November 7, 1993|By Dick Marlowe of The Sentinel Staff

Despite mounting fears of a long-awaited correction, the stock market danced nervously through October unscathed and continued to make highs through the month known for Halloween's goblins and crashes of the Dow Jones industrial average.

November, however, came in looking a little spooky as investors decided early in the month to bail out of financial and utility stocks because the specter of higher interest rates have been seen lurking in the bushes. A bull market has been raging for some time, and there are hundreds of thousands of new investors who have not yet been visited by a bear market. Jon Bachmann, a veteran independent investment adviser who analyzes stock listings like avid sports fans examine box scores, has done some homework to explain how bear markets work.

According to his research, bear markets - since 1929 - begin every 5.37 years, last about 18 months, result in a 38.8 percent decline in the price of stocks and require 5.5 years for investors to make up their losses. Bear markets can be tipped off, he adds, by a string of monthly highs in margin debt - the term given to the practice of borrowing money to buy stocks. Margin debt is at more than $53 billion, a record high.

Bachmann, who has been bearish on stocks for some time, thinks that the correction that did not come in October has simply ''been postponed until November.'' While the stock market benefited in recent weeks from reports of good corporate earnings, Bachmann thinks ''whatever comes in for the rest of the year has already been discounted.''

And although the Dow has made numerous new highs this year, Bachmann considers them ''phony'' highs made possible by low interest rates and other factors. Interest rates are sure to go up in the first quarter of 1994, he reasons, because the Federal Reserve has completed its goal of keeping rates artificially low so that banks could atone for their sins of the 1980s.

A troubling thought for many stock market analysts is that so many investors are in the market for the first time - and no one can predict whether they will panic and run when the bear shows up. The Nov. 1 issue of Low Priced Stock Survey sums up the situation with its observation, ''Despite historic amounts of money flowing into equity mutual funds, many analysts do not feel that investors are unduly optimistic. They state that investors are not entering the market with greed in their eyes, but that they simply have nowhere else to go.''

Bachmann reasons that, as interest rates rise, the nervous investors will find places to go - where the heat is a little less intense and the comfort level more to their liking. A lifetime student of the stock market, Bachmann says investors who watch the Dow Jones industrial average alone often get burned. You can spot a phony high, he explains, by keeping an eye on the number of advances and declines.

It is obviously a phony high, he said, when a new record is made on the Dow even though there are more declines than advances in prices of stock traded. The venerable Dow is an index of just 30 blue-chip stocks. Bachmann also counts the unchanged stocks as declines, feeling that no movement in the price of a stock is a negative sign. When the Dow made a new high last Tuesday, for example, there were 891 advances, 1,131 declines, and 651 issues with no change. Adding the declining issues to those that stood pat, the score becomes even more one-sided to the negative side. Bachmann also charts stocks that hit new highs and lows. On Wednesday, there were 53 new lows - a record for the year and a stern warning.

Even though the Dow may be soaring, Bachmann contends, people who do not look at the other numbers ''are going to lose money.'' What Bachmann calls the ''phony highs'' of the Dow have been built on low interest rates, he adds, and declining utility stocks have been warning since mid-September of a pick-up in interest rates. Asked how far the correction might go, Bachmann, said, ''Who knows? It might go to 3,300 before a meaningful rally.''

Although he expects the customary year-end market portfolio-adjustment rally, Bachmann adds a note of gloom with the closing thought, ''It's 1994 I'm worried about.'' His major concern is that the U.S. economy is not mustering much steam and that it might not be able to avoid falling back into recession.